Credit Suisse team puts the onus on exports

Soss-led group wins Forecaster of the Month award for December picks

By

LauraMandaro

SAN FRANCISCO (MarketWatch) -- Americans' unflagging ability to shop got us out of the country's last bout of economic doldrums. This down cycle, says Credit Suisse chief economist Neal Soss, it will fall to U.S. exports to do the heavy-lifting.

"In the past, the U.S. could consume as much as we wanted," said Soss. "Now, we think you'll need more exports."

"We have to change resources from building houses to stuff that foreigners want from us. That's our baseline forecast," he said.

Soss and his Credit Suisse team won MarketWatch's Forecaster of the Month as a result of giving the most accurate estimates on recently released economic data: Their forecasts were in the top ten in six of 10 indicators. This is the second time Soss and his colleagues have won in just over a year. See previous profile.

They made their best picks by taking a more downbeat view on December's new-home sales and December payroll growth than 43 rival economic teams. They also made a better forecast on durable-goods orders, rightly estimating that growth would get a big boost from Boeing Co.
BA, -0.84%
and its end-of-year aerospace orders.

Soss emphasizes that the results come from collaboration among himself and economists Jonathan Basile, Jay Feldman and Jill Kaufman. They take a broad view of where the economy's heading and how it will get there. Then they crunch the numbers for individual months.

The big-picture view helps them fine-tune their ultimate estimates.

The Credit Suisse group had been getting increasingly nervous about the economy during October and November: News from the financial sector suggested that what had been a problem largely contained to mortgage markets was becoming a more generalized credit crunch.

Even with lower interest rates, stiffer lending restrictions mean fewer buyers for new homes or other purchases.

"People who would have been customers before just can't get credit," Soss said.

December's surprisingly weak jobs report, which showed the U.S. economy added a mere 18,000 nonfarm payroll positions, was foreshadowed by a rise in jobless claims and weak jobs components of other surveys.

With credit conditions tight and the job market sluggish, Soss's team expects personal consumption to be "noticeable slower" than it has in years page -- and that drag, in turn, expected to show up in other sectors of the economy. They're estimating personal consumption, which makes up about 70% of the economy now, to slow to 1.6% growth in 2008 from 2.5% last year and 3.4% in 2006.

Sea change

The turnaround, says Soss, will come from a sea change in the American economy. Rather than getting a boost from accelerated consumer spending, exports of manufactured goods and services will trigger economic growth.

He's looking for the United States to become much more of an export-oriented economy than it has in decades.

Part of that shift -- or what economists call a current account adjustment -- is by necessity. As evidenced by the weak dollar, foreign investors are not as keen on lending money to the United States to finance endless spending growth, Soss says.

"For the first part of this decade, the recession was extra mild for consumers because we were able to borrow from foreigners," he said.

Now exports, which have already picked up, will take on a bigger role powering the economy, Soss's team is forecasting. That won't happen overnight; nor will exports surpass personal consumption as the biggest driver of the economy.

Still, says Soss, "if you could tilt it a couple of percentage points ... it makes a gigantic difference to the way the economy runs."

As of the fourth quarter, exports currently made up 12.3% of the U.S. economy, the fourth-biggest contributor after consumer spending (70.5%), imports (17.4%) and state and local spending (12.6%). Exports rank as a bigger contributor than housing.

The best

Soss, who worked at the Federal Reserve Bank of New York, at the Federal Reserve itself under Paul Volcker and for the Comptroller of the Currency, has been at Credit Suisse since 1984. He earned his undergraduate degree from Williams College and his Ph.D in economics from Princeton University.

The runners-up for MarketWatch's January contest were Brian Bethune and Nigel Gault of Global Insight, Avery Shenfeld of CIBC, Ellen Beeson Zentner of Bank of Tokyo-Mitsubishi, and Jeoff Hall of Thomson Financial IFR.

The median forecasts that MarketWatch publishes each week in the Economic Calendar come from the forecasts of the 10 economists who've scored the highest in our contest over the past 12 months, as well as the forecasts of the most recent winner and the forecasts of MarketWatch chief economist Irwin Kellner.

In the past 12 months, the top 10 forecasters were, in order: Stephen Stanley of RBS Greenwich Capital, Bethune and Gault of Global Insight, Maury Harris's team at UBS, Ahmed Haseeb at J.P. Morgan, Ian Shepherdson of High Frequency Economics, Stephen Gallagher of Societe Generale, Dean Maki of Barclays Capital, Jan Hatzius's team at Goldman Sachs, Lou Crandall of Wrightson ICAP and Soss's team at Credit Suisse.

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